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WASHINGTON D.C. -- IT staffing firms that rely heavily on H-1B visa workers to deliver their services say they are now in a fight for survival due to new rules created by the U.S Citizenship and Immigration Services (USCIS).

The industry has reacted quickly.

Three IT staffing firms, which hire H-1B workers as software engineers, developers and analysts, have joined with TechServe Alliance, an Alexandria, Va.-based IT services industry association, to file a lawsuit challenging a USCIS memo released early this year which requires that the companies maintain direct control of employees assigned to third party worksites.

The requirements of the memo are antipathetic to the business model of staffing firms, which may not necessarily be able to maintain day-to-day oversight of a temporary worker's assignments. Critics say the USCIS action is a direct result of pressure from some in Congress to limit the use of H-1B visas.

Visa workers make up as much as 90% of workers assigned by the staffing firms involved in the lawsuit, filed in federal court here.

The lawsuit says the USCIS actions could cost the IT staffing industry some $100 million in business annually.

The firms that joined TechServe in filing the lawsuit are: Broadgate, Inc. in Troy, Michigan, which counts 21 H1B visa holders among its 46 IT workers; Logic Planet, Inc., in Edison, N.J., which employees 95 IT workers, including 89 on H-1B visas; and DVR Softek Inc., also in Edison, N.J., which says that 45 of its 50 tech workers hold H-1B visas.

The group is seeking an injunction that would prevent the USCIS from enforcing the memo.

Over the past year, the USCIS has increased enforcement of the H-1B program through on-site inspections and new rules seeking increased paperwork from firms to justify their use of foreign workers.

But what really angered much of the staffing industry was the so-called Neufeld Memo, written by an associate director at USCIS, Donald Neufeld, that opponents contend upended the rules for H-1B workers assigned to third party work sites.

Technology industry companies use H-1B workers in a number of ways.

Some are hired by major companies like Microsoft or Google as staff employees. Large offshore firms, including Infosys and Tata Consultancy Services, hire H-1B workers to complete customer outsourcing projects and to work with overseas operations. And small and mid-size firms often hire H-1B workers to fill specific needs at third party customer sites for projects that may take less than a year -- similar to traditional temporary employment processes.

The Neufeld memo requires that management at staffing firms maintain day-to-day control of employees assigned to third-party sites. Critics contend that the ruling overlooks the right of staffing agencies to hire, fire and pay as well as supervise some elements of the work completed by the H-1B worker at a third party site.

The net impact of the memo has been to block the transfer of H-1B workers to new sites so they can take on new projects.

When an H-1B employee moves from job to job, they typically transfer their H-1B visa to a different company. Since the memo was issued, the USCIS has been blocking those transfers, said Mark Roberts, the CEO of the TechServe Alliance.

The immigration service has also been rejecting some initial applications for H-1B workers.

Roberts said the USCIS action is having "a chilling effect on the industry" because consultants with H-1B visas are now fearful of moving to a different company, which is causing some contracting deals to fall apart.

"All this will lead, ultimately, to more offshoring -- companies always get done what they need to get done. [Now] they will get it done offshore," said Roberts.

The tech industry has argued that staffing firms fill technology gaps; critics say the IT staffing firms can bring in less costly H-1B workers who displace U.S. workers.

"If the mere requirement that people actually work for their employer will put many companies out of business, that demonstrates the extent of the rampant abuse in the H-1B program," said John Miano, founder of the Programmers Guild. "When Congress created the H-1B program it expected that such visas would only be used when U.S. workers cannot be found and as a last resort."

A USCIS spokesman said the agency won't comment on the lawsuit.

Eleanor Pelta, first vice president of the American Immigration Lawyers Association, said the USCIS took direct aim at the IT staffing companies with the memo. She called it "an attempt to carve out staffing companies from being eligible for H-1Bs."

The Neufeld memo redefines the concept of worker control, requiring that an employer must be "directly over the shoulder of the employee" in order to have an employer-employee relationship.

The USCIS has been under pressure from some in Congress, particularly Sen. Charles Grassley (R-Iowa) and Dick Durbin (D-Ill.), who have called on the agency to implement more controls and scrutiny of the use of H-1B workers.

The use of H-1B staffing agencies has long been a point of contention with in the H-1B debate, and the lawsuit may well bring the issue to a head.

Patrick Thibodeau covers SaaS and enterprise applications, outsourcing, government IT policies, data centers and IT workforce issues for Computerworld. Follow Patrick on Twitter at @DCgov, or subscribe to Patrick's RSS feed . His e-mail address is pthibodeau@computerworld.com.